In re Comm'n Review of the Capacity Charges of Ohio Power Co., s. 2012–2098

• Decision Date: 21 April 2016
• Docket Number: 2013–0228.,Nos. 2012–2098,s. 2012–2098
• Citation: 60 N.E.3d 1221,147 Ohio St.3d 59
• Parties: In re COMMISSION REVIEW OF the CAPACITY CHARGES OF OHIO POWER COMPANY and Columbus Southern Power Company; Office of Ohio Consumers' Counsel, Appellant and Cross–Appellee; Ohio Power Company, Appellee and Cross–Appellant; Public Utilities Commission, Appellee and Cross–Appellee.
• Court: Ohio Supreme Court

147 Ohio St.3d 59

60 N.E.3d 1221

In re COMMISSION REVIEW OF the CAPACITY CHARGES OF OHIO POWER COMPANY and Columbus Southern Power Company; Office of Ohio Consumers' Counsel, Appellant and Cross–Appellee; Ohio Power Company, Appellee and Cross–Appellant; Public Utilities Commission, Appellee and Cross–Appellee.

Nos. 2012–2098

2013–0228.

Supreme Court of Ohio.

Submitted Dec. 15, 2015.

Decided April 21, 2016.

Bruce J. Weston, Consumers' Counsel, and Kyle L. Kern and Maureen R. Willis, Assistant Consumers' Counsel; and Dane Stinson, Columbus, for appellant and cross-appellee, Ohio Consumers' Counsel.

Mike DeWine, Attorney General, William L. Wright, Section Chief, and John H. Jones, Thomas W. McNamee, and Steven L. Beeler, Assistant Attorneys General, for appellee and cross-appellee, Public Utilities Commission of Ohio.

Matthew J. Satterwhite and Steven T. Nourse ; Porter, Wright, Morris & Arthur, L.L.P., Kathleen M. Trafford, Daniel R. Conway, and L. Bradfield Hughes ; Murray, Murphy, Moul, & Basil, L.L.P., Columbus, and James B. Hadden ; MoloLamken, L.L.P., and Jeffrey A. Lamken, for appellee and cross-appellant, Ohio Power Company.

KENNEDY, J.

I. SUMMARY

{¶ 1} This case arises from the Public Utilities Commission's approval of a capacity charge for the American Electric Power operating companies, Ohio Power Company and Columbus Southern Power (collectively, “AEP”). Competitive retail electric service (“CRES”) providers that sell generation service in Ohio must ensure that they have sufficient capacity to meet customer demand. Because AEP is responsible for providing capacity to all suppliers of electricity within its service area, CRES providers who operate in the company's territory rely on AEP's capacity resources to meet their generation needs. In the orders on appeal, the commission authorized AEP to implement a new cost-based charge for capacity service that AEP offers to CRES providers.

{¶ 2} The commission orders addressed many issues, and the Ohio Consumers' Counsel (“OCC”) appealed.¹ AEP also filed a cross-appeal. We have determined that AEP has demonstrated one commission error. Therefore, we affirm the commission's orders in part and reverse them in part and remand the cause for further proceedings.

II. FACTS AND PROCEDURAL BACKGROUND

{¶ 3} The Federal Energy Regulatory Commission (“FERC”) regulates capacity markets under its preemptive authority over wholesale electricity. See 16 U.S.C. 824(b)(1). “Capacity” refers to the ability to supply sufficient electrical power to meet the highest level of customer demand. In order to maintain the reliability of the power grid, generators will produce more electricity than necessary to meet anticipated demand, plus a reserve margin to guard against unforeseen events.

{¶ 4} AEP participates in the PJM Interconnection, L.L.C. (“PJM”) capacity market. See Pub. Util. Comm. No. 10–2929–EL–UNC, at 3 (July 2, 2012) (the “Capacity Order”). AEP is a party to the PJM Reliability Assurance Agreement (“RAA”). The RAA is a FERC-approved rate schedule that is intended to ensure that there are adequate capacity resources to maintain reliability in the region covered by PJM at the lowest possible cost. PJM Reliability Assurance Agreement, available at http://www.pjm.com/documents/agreements.aspx (accessed Jan. 27, 2016); Am. Elec. Power Serv. Corp., 134 FERC ¶ 61,039, 2011 WL 182468, at **1 (Jan. 20, 2011).

{¶ 5} The RAA uses an auction process as the primary method by which capacity is purchased and priced in the PJM region. However, the RAA also contains an alternative method for meeting capacity obligations, the “Fixed Resource Requirement Alternative” (“FRR Alternative”). In lieu of participating in the PJM auctions, a load-serving entity,² such as AEP, may elect to satisfy all capacity obligations in its service territory. AEP has chosen the FRR Alternative, and hence, it was responsible for satisfying all PJM-determined capacity-resource obligations for all loads (for both shopping and nonshopping customers) in its service territory through May 31, 2015. See Capacity Order at 10.

{¶ 6} The RAA also addresses how load-serving entities—i.e., generators like AEP that supply wholesale power to the PJM region grid—are compensated for capacity services. As noted, the RAA primarily uses auctions to set the price for capacity resources in the various PJM regions. See id.; Am. Elec. Power Serv. Corp., 134 FERC ¶ 61,039, 2011 WL 182468, at **1 ; RAA, Schedule 8.1. The RAA, however, also allows for capacity pricing to be determined through a “state compensation mechanism,” in states that have implemented retail choice. Under this provision, the state public-utility commission determines the cost that CRES providers must pay FRR Alternative entities—such as AEP—for this capacity service. RAA Schedule 8.1, Section D.8.

{¶ 7} Since the start of the PJM capacity market, AEP had been receiving compensation from CRES providers for capacity service at market prices, as determined by PJM auctions. However, in November 2010, AEP filed an application with FERC seeking to change how it was compensated for providing capacity to CRES providers. Specifically, AEP wanted to change from auction pricing to cost-based pricing.³

{¶ 8} This case was opened when the commission found that an investigation was necessary to determine the impact of AEP's proposed change. Capacity Order at 3. After opening the case, the commission formally adopted a state compensation mechanism for AEP's capacity charge and set that charge based on the most recent capacity auction conducted by PJM. Capacity Order at 3–4; Pub. Util. Comm. No. 10–2929–EL–UNC, at 2 (Dec. 8, 2010).

{¶ 9} On July 2, 2012, the commission issued its order finding that AEP was entitled to recover the actual costs it incurs to supply wholesale capacity to CRES providers in its territory. According to the commission, AEP was entitled to recover its actual costs based on its status as the sole provider of capacity in its service territory.

{¶ 10} The commission found that it had statutory authority to establish a cost-based “state compensation mechanism” to price capacity—rather than rely on PJM auctions. The commission rejected the contention of some parties that it was bound by R.C. Chapter 4928 in setting the capacity charge, which governs competitive retail electric service. The commission found instead that the capacity service at issue is not a competitive retail electric service, because AEP was not providing capacity to end-use energy consumers. Rather, AEP was providing capacity to CRES providers, who resold that service to retail customers. The commission therefore determined that it could rely on R.C. 4905.04, 4905.05, and 4905.06 to approve a cost-based charge, because the transaction is appropriately characterized as an intrastate wholesale transaction.

{¶ 11} On rehearing, the commission clarified that it also had authority under R.C. 4905.26 to open the investigation in this case and to set the rate for capacity service. Pub. Util. Comm. No. 10–2929–EL–UNC, at 29 (Oct. 17, 2012).

{¶ 12} The commission also found that its decision was consistent with the FERC-approved RAA, which as previously mentioned, allows state public-utility commissions to establish a “state compensation mechanism” to price wholesale capacity. The commission also noted that a state compensation mechanism, once established, prevails over other compensation methods under the RAA.

{¶ 13} After finding that it had authority to approve a cost-based capacity charge, the commission determined that AEP's cost to provide capacity was $188.88 per megawatt-day. But because this was well above the market price for capacity in the PJM region at the time (as established by PJM auctions), the commission was concerned that AEP's capacity charge would inhibit retail shopping in its service area. For this reason, the commission ordered that CRES providers would be required to pay only the market price for capacity, under the theory that this would provide incentive for CRES providers to offer lower retail electric prices, which would promote retail competition.

{¶ 14} The commission then authorized AEP to defer recovery of the difference between the market price charged to CRES providers and the $188.88 megawatt-day price (which reflected the company's actual capacity costs) and also authorized AEP to collect carrying charges on the deferral. The commission further ordered that an appropriate mechanism to recover the deferred charges would be established in AEP's second electric-security-plan (“ESP”) case.⁴

{¶ 15} Following three rounds of rehearings, the Office of the Ohio Consumers' Counsel (“OCC”) appealed the commission's decision in this case (“the capacity case”) and AEP filed a cross-appeal.

A. The Commission's ESP Order

{¶ 16} In the ESP case, the commission approved the “Retail Stability Rider” (“RSR”) as the mechanism for AEP to recover its deferred capacity charges. In re Application of Columbus S. Power Co., Pub. Util. Comm. Nos. 11–346–EL–SSO, 11–348–EL–SSO, 11–349–EL–AAM, and 11–350–EL–AAM (Aug. 8, 2012) (the “ESP Order”).⁵ The RSR was established as a “nonbypassable” rider, meaning that it is paid by both shopping and nonshopping customers in AEP's service territory. In addition, the commission authorized AEP to begin its recovery of a portion of those costs during the ESP period. The commission further instructed AEP to file an application after the ESP ended that, if approved, would allow the company to recover any remaining deferred capacity charges starting on June 1, 2015, and continuing over the following 32 months.

B. AEP's Applications with FERC

{¶ 17} In March 2013, AEP requested that FERC confirm that the state compensation mechanism approved by the commission is consistent with the RAA. AEP submitted a proposed appendix to the RAA with its request. See PJM Interconnection, L.L.C., 143 FERC ¶ 61,164, 2013 WL 2283427 (May 23, 2013).

{¶ 18} On May 23, 2013, FERC granted AEP's...